Major Opportunities Ahead! Global Macro is Key!

Global Macro Analysis 30th November 2015

We have an important week lying ahead, a week that will probably not only reveal, what to expect in the major currencies in the short term but, can also set the tone for the first few months of 2016. The week is packed with economic releases and the focus once again will be on sentiment and expectations about future monetary policy. Particular attention should be placed on ECB’s meeting on Thursday, as we are expecting to see whether Mario Draghi will extent QE in the Eurozone and OPEC’s meeting in Austria on Friday as there are reports that some OPEC members including Iran, are putting pressure on Saudi Arabia to lower production.

Once again we are presented with three major macro catalysts that drive prices, the ECB’s QE program, the potential US rate hike and pace of tightening and perhaps the most important of all, the Chinese response to US monetary policy and a potential devaluation of the Yuan. The consequences to the global economy and to the risk environment cannot be underestimated.

The Week Ahead

The coming week is pivotal and unprecedented in terms of the gravity of the decisions to be made and we should expect or at least prepare for increased volatility. That also means that good trading opportunities will be created if we are prepared to pay attention to the news flow and fundamentals.

In the next few days there are important data releases that can move FX markets. Overnight on Monday we will see the manufacturing PMI from China and the Caixin PMI as well.The Caixin PMI in particular is critical to both commodities and the Aussie Dollar. With recent data showing a serious drop in industrial growth in Chinathere is little surprise that commodities continue to hit lows. The so called ’super-cycle’ of 10 years is expected to continue for some time with some analysts predicting a two of three year period of stagnation before any improvements will be seen.

The market will now be super sensitive to the Chinese manufacturing data, and whilst improvements have been seen in the services sector, it is the industry sector that mostly affects the global economies and thus market sentiment.

In Australia, also overnight on Monday, the RBA will make its decision on rates. The expectationis that with both the ECB and the Fed decision ahead this month, they are unlikely to change their policy but the language of the statement will be important to monitor for any clues as to future intentions. At their last meeting the door was left open to rate cuts, should conditions in China worsen,so we will be watchful for anything dovish in their tone.

On Tuesday, the UK will announce the Bank Stress Test results. This can impact both the GBP and the FTSE. Additionally, Carney will be speaking and that is always unpredictable, as he is prone to change his mind but, recently has indicated that we should expect rates to stay low until the middle of 2016 at least. With weak inflation Carney is in no hurry and he will also want to wait to see howthe ECB and the US policy decisions play out. 

The US weighs in on Wednesday with ADP Non-Farm Employment change and of course the testimony of FED’s Head Yellen. Also on Wednesday, the Canadians have their rate decision the same day and are obviously very exposed to the outcome of the OPEC meeting on Friday.

Draghi faces his own dilemma on Thursday with the much anticipated ECB rate decision and monetary policy statement. We should be prepared for an upside surprise in the EUR, should the decision adopt a mild approach. In any event no assumptions can be made, especially as politics is involved which includes some German opposition to further easing. It may well be a good week to leave the Euro alone. There are better opportunities on offer elsewhere.

The week ends with another two major events. The all-important US NFP, with the implications that may have for the rate hike cycle and particularly the definition of the word ‘gradual’ and the OPEC’s meeting, where we wait to see, if Saudi Arabia will agree a reduction in their crude production, in order to support and improve the slumping prices. The expectation leans against such an agreement but, it is yet another decision we cannot assume. The consequences of change in this arena would be felt everywhere.

TheOpportunities

SP500

This equity index can provide early indications of shifts in sentiment and to identify whether we arein a risk on or risk off environment. We are approaching a strong resistance area but we are looking to initiate a short position only below 2070.

 USDJPY

A look at the weekly chart shows us that we are in an uptrend and the target is now higher towards the upper trend line. A clean break can provide a strong move much higher. This is clearly driven by the upcoming US monetary policy decision.

USDCAD

Target here is1.40, weekly is showing a strong up trend, the best areas to enter, if US fundamentals remain strong, for pullback around 1.3190 or a break of 1.34496 to the upside. This of course will be affected by the BOC’s rate decision and the OPEC’s meeting.

USDSGD 

This has moved down on a stronger than expected SGD GDP. Looking for a buy on pullback at support, provided that US policy remains hawkish.

EURAUD

We had the signal to sell a few weeks ago with a potential target of 1.3520. It is a good technical pattern and may have lower to go if Aussie rates stay unchanged and Draghi extents QE. 

GBPUSD

The structure looks good for a short and the move down could be significant, if the fundamentals are quite bad for the UK.

This depends on the calendar events also which include PMI’s stress tests and Carney. This week will give some indications of the health of the UK economy

GBPAUD

Similar pattern with a triangular formation and could yield a significant move down. Risk/reward could be very good in this pattern.

Medium to longe rterm, the most important catalyst continues to be China and just how they react to US policy. They may take a path of significant easing to support their own economy and this in turn will have consequences for emerging markets the global economy in general.

We have ahead a very news rich week, which has the potential to bring the edge in our favor, if we pay close attention and understand the bigger picture, take all necessary steps to control risk and know precisely the market structures that yield the highest probability of success.

Thank you!

Fotis Papatheofanous, MBA